Fidessa group plc (LSE: FDSA) has today announced a new partnership with Commcise that brings to the market a transactional method for funding Research Payment Accounts (RPAs).
This allows the industry to support evolving MiFID II regulatory requirements whilst at the same time improving operational efficiency.
It is estimated that 75% of European buy-sides pay for research via Commission Sharing Agreements (CSAs) which allows them to reward providers of research via dealing commissions. But under the new rules endorsed in the Delegated Directive released by the European Commission on 7th April 2016, buy-sides must clearly demonstrate that the research charge is separately identifiable to the client. In addition, they will need to be able to demonstrate that they have robust processes in place for tracking and measuring what is spent. One approach to the problem is to charge upfront research fees to end investors which are then used to fund an RPA.
This approach, however, requires renegotiation of every single relationship between the fund manager and their end investors and, under current legislation, will also be liable to VAT. As a result, many firms have been looking at how they can fund their RPAs using dealing commissions thereby maintaining the approach introduced by CSAs.
Under the traditional CSA model buy-side and sell-side firms agree commission splits in advance of executing a trade. The new approach moves this decision into the post-trade arena which makes it both more efficient and less open to conflict. Furthermore, the asset manager is now empowered to determine exactly how much commission should be added to trades at a fund level. This creates a model that respects fund level budgets and can also be considered across asset types.
Fidessa and Commcise have worked together to provide a solution that leverages the strengths of the market-leading technology that both firms represent. Commcise Buy, the award winning buy-side focused commission management platform, provides an algorithmic rules engine that dynamically calculates research charges at allocation level for the asset manager. Fidessa's award winning AMS global post-trade utility provides buy-sides and sell-sides with workflow and technology to confirm and affirm these trades. Under the terms of the partnership, AMS has been extended to support this buy-side determined research charge so that can it can be delivered directly into sell-side settlement operations.
Steve Grob, Director of Group Strategy at Fidessa, commented: "Firms wishing to use an RPA have to demonstrate competence in three distinct areas: (i) funding; (ii) research evaluation; and (iii) reporting. The approach proposed by Fidessa and Commcise reuses existing CSA infrastructure to simply and effectively solve this funding challenge for the industry. We were approached by Commcise as they have already solved the research evaluation and reporting elements required to demonstrate compliance with the new MiFID II regulations."
Amrish Ganatra, Managing Director of Commcise, commented: "We are excited to announce our partnership with Fidessa as it provides the industry with a natural evolution to the existing CSA model. By allowing asset managers to determine a research charge independent of their trade execution, any suggestion of conflict is removed and, at the same time, the research charges can respect budgets. Above all, they can be calculated in a manner that is not linked to trading value or volume which lies at the heart of the new regulations. Whilst we have started with cash equities, we know that this can be applied across multiple asset types too. Fidessa AMS is not based around central matching and so allows the buy-side to drive this process. In this way, AMS provides the ideal transport mechanism and workflow to ensure that trades can efficiently settle under this new model."